By Andrea Shalal and Leika Kihara
WASHINGTON, Nov 6 (Reuters) – Bank of Japan Governor Kazuo Ueda said on Friday the central bank expects underlying inflation to stay around its 2% target but recognizes there are “some upside risks”.
The rise in prices of energy-related products was beginning to hit consumer inflation with price growth seen accelerating further into early next year, Ueda said.
“We are in an equilibrium with wages growing at a level consistent with 2% inflation,” Ueda said at a seminar hosted by the International Monetary Fund.
But the BOJ’s 2% inflation target has yet to become a social norm in Japan, Ueda said, adding that the central bank’s goal now was to anchor underlying inflation around its target.
He also said the BOJ was looking at the actions of other central banks “very, very carefully,” as they affect asset prices including foreign exchange rates and interest rates.
“What they do reveals important information about what they think about their economies, which will impact our economy. So we look at their behavior and actions very carefully,” he said on the policy measures of other central banks.
On unconventional monetary policy tools, Ueda said they have had some positive effects when the BOJ deployed them, but added they have not been perfect substitutes for cutting interest rates from positive territory.
The BOJ may be obliged to deploy unconventional policy tools again depending on the severity of the economic shock that may hit Japan, Ueda said.
“I guess the important thing would be to keep inflation or underlying inflation at around 2% as much as possible. But if we need to deploy these tools again, we should think about ways to minimize negative effects, including possibly the effect on the functioning of the market,” he said.
Asked about discussions sparked by new Federal Reserve Chairman Kevin Warsh about excessive communication, Ueda said central banks needed a good balance between the need to communicate policy goals and the risk of creating a moral hazard on the part of the market.
“There has to be a good balance between these considerations,” he said, adding that in Japan’s case, it had been using underlying inflation as a key variable in guiding policy. Having reached 2% underlying inflation, its goal now was to keep it there, he said.
AI, CYBER CHALLENGES
Ueda commented briefly on the promise and risks of artificial intelligence, saying rapid advancements in AI had provided a positive demand shock for the Japanese economy, but supply side factors would also need to be studied.
Unlike some other countries, Japan could do well with AI replacing labor given its significant labor shortages, he said.
IMF Managing Director Kristalina Georgieva, noting recent market weakness around AI stocks, said central bankers around the world would need to consider any slowdown in AI-driven growth as they assess steps in their fight against inflation.
Georgieva said concerns about dependence on the AI investment boom and high valuations were impacting markets around the world.
“Things are going up and down, and this is likely to continue,” she told an audience of hundreds at the IMF headquarters in Washington who came to hear Ueda, adding that the volatility would complicate the job of central banks at a time when risks to price stability had been growing.
Ueda said he also worried about cyber risks in terms of financial stability, adding that some small banks and small firms had not done enough to guard against such risks.
(Reporting by Andrea Shalal, additional reporting by Leika Kihara in Tokyo; Editing by Nia Williams and Alexander Smith )
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